Mississippi has been a pioneer in the field of sales and income taxation at the state level. Mississippi was the first state to enact and successfully administer a sales tax at the retail level. Our income tax law was placed into effect in 1912, one year before the Federal income tax levy was enacted. Receipts from the Mississippi sales tax have been our principle source of general fund revenue since the law was enacted in 1932. Our use tax law became effective in 1936. Sales and use taxes presently constitute 48% of the general fund revenue. Income taxes produce 22% of general fund revenue. The balance of 30% is derived from miscellaneous privilege and excise taxes. It is only natural that we would be concerned with any Federal legislation that could affect our major sources of revenue. Saics and Use Taxes

The fundamental purposes of the use tax, in our view, are to protect the Mississippi merchants from unfair competition and to equalize the tax burden on all Mississippi consumers. This equality and universality had contributed to the widespread acceptance of sales and use taxes as reliable methods of raising the revenue necessary to fund state government. We believe it, therefore, important to minimize the avenues of escape by citizens from a fair share of the burden of the tax and from the duty of collection by merchants who enjoy the benefits of making sales to Mississippians. There is, we are convinced, a direct correlation between these two aspects of use tax administration.

It has been suggested that a shift in the collection burden from the vendor to vendee is not unreasonable in that most of the sales involved are to business buyers; and, if the buyer does not report and pay the tax, his liability will nevertheless be established in the course of routine sales and use tax audits. But this suggestion overlooks several important points. First, there is a considerable volume of sales to individual nonbusiness consumers. In effect, the tax now collected with respect to their purchases would be written off. Second, an increase in audit staff would be necessary to audit an acceptable high proportion of presently registered taxpayers. (We audit annually approximately 8% of our presently-registered sales and use taxpayers.) Third, it would be necessary to register a large number of businesses and professions not now subject to registration because they do not make sales of tangible personal property at retail. An additional expansion of the audit staff would be required to service these new registrants. Then there is the further point to be considered that this shift in the collection burden will put the local retailer at a disadvantage-and also the national and regional retailers operating through fixed places of business in a state-in that he has to add on and collect the sales tax from his local customer while an interstate competitor actively soliciting sales from the same cusomers-business and nonbusiness-would not have to do so. We believe this is a point about which all retailers, strictly local, and national and regional, operating through fixed places of business are now quite aware.

From the state tax department standpoint, the elimination of the solicitationonly basis of jurisdiction presents grace problems-the main one being that it would suddenly become necessary to attempt to collect use taxes from a relatively large number of buyers rather than from a relatively small number of sellers. In other words, a game of hide and seek with the local instate business, who has no place to hide, picking up the tab for the party.

In our opinion, the U.S. Supreme Court made an important contribution to the welfare of the states when in the Scripto case escape was denied to vendors exploiting a state's market from without the state by means of salesman solicitation. We are pleased that one provision of Senate bill 2173 would likewise require those out-of-state vendors who make household deliveries in the taxing state to accept what we believe to be a reasonable responsibility to the state in which sales are made. We suggest that deliveries to commercial and industrial establishments is an even more important and better justified criterion for jurisdiction.

We have been disappointed that the Court in the National Bellas Hess case granted business firms enjoying large volumes of sales and exerting a tremendous impact on the economy of a state an immunity from any regulation or control in return for benefits received. Mail order houses selling every conceivable type of merchandise now divert substantial quantities of sales from local tax-paying merchants while operating from privileged sanctuaries. Other dealers in cities just across state lines capitalize on the opportunity to ship

or deliver sales generated by various advertising methods or selected by visiting customers without collection of any tax. These situations, if encouraged, must surely erode the confidence of local merchants and even the beneficiaries of the practice in the essential fairness of this method of taxation. In our judgment, the greatest need of the states is to "close these gaps." We appeal to the Congress for help.

We recognize the need to confine the burden imposed upon multistate taxpayers to reasonable proportions. We acknowledge that proliferation of local taxes, multiple rates, varying interpretations and regulations involved in compliance with sales and use taxes, collectively with all other federal, state and local government requirements, justify establishment of uniform jurisdictional standards. It is suggested that this can be done, however, while broadening rather than narrowing the jurisdiction of the states. One example of such an approach might be to require certain degrees of centralized administration and distribution at the state level along with standardization of rates and exemptions as prerequisites for authority to require businesses shipping merchandise valued at amounts above certain minimums to comply with state laws. It is quite probable that states would find it sufficiently beneficial to justify amendment of their statutes to conform to such standards. In some such manner, we believe the relief for business overburdened by multitudinous requirements, which we perceive to be the major thrust of S. 2173, can be achieved while at the same time not jeopardizing what we believe to be the fiscal lifeblood of the states.

Any jurisdictional guidelines should be realistic and should address the question of the true intent of a vendor with respect to his relations with customers in another state. If intent is evidenced by the vendor in any form to exploit or obtain business in another state, authority to require collection of the tax should be statutorily provided. Therefore, jurisdiction to impose or require collection of a sales or use tax should, by law, exist if the vendor has a business location in the state, regularly solicits orders for the sale of tangible personal property through salesmen, solicitors, or other representatives in the state, or regularly engages in the delivery of property in the state other than by common carrier or United States mail. This is in effect a codification of the General Trading-Scripto-Bellas Hess rules with the addition of regular delivery (not only household deliveries but any deliveries) basis of jurisdiction. The definition of a business location should, likewise, include leased-out tangible personal property.

The gist of our opposition to the sales and use tax provisions of S. 2173 is, therefore, basically two fold-(1) the very limited jurisdictional standard afforded to the states and (2) the business buyer concept. These two coupled together would in effect dictate to the State of Mississippi that it collect the bulk of its use tax revenue directly from the purchaser-an impractical task at best. While we don't like red tape either, if in the final analysis, there should prove to be no way to obtain relief for a relatively small number of persons making interstate sales from inconvenience and irritation without serious injury to the tax structure of the several states; if there should be no way to serve the interests of both parties (we think this is not so), then, we think it apparent in which course of action lies the greater good for the greater number. The section of S. 2173 which we think would be the most injurious to Mississippi and of which we most strongly urge reconsideration is section 105. We have learned from 45 years experience that if wholesalers are permitted to sell every kind of tangible personal property to any retailer regardless of how unrelated it may be to his regular line of business, either the cost of collection will become exorbitant or very large numbers of sales will escape taxation. Our experience has been that wholesalers protesting as unfair our statutory requirements limiting the application of wholesale rates to property reasonably expected to be for resale in the retailer's regular course of business have found. upon trial, compliance not to be excessively burdensome.

We find it difficult to expect that our legislature, if forced to permit sales by nonresident vendors to any registered sales or use taxpayer, regardless of the nature or size of his business, would not feel compelled to extend the same privilege to resident vendors. This would, of course, convert the tax structure from a vendor-oriented tax to a vendee-oriented one. We greatly fear this would create so many loopholes that the purpose of raising revenue would be seriously impaired despite increased expenditures for enforcement, while equality

of application would be largely destroyed. If ever-increasing numbers of people find ways to escape the tax, the state will have to either find new sources of revenue or increase the burden on those who cannot escape.

While an interstate business is concerned with the practical problems of complying with or avoiding the need to comply with a number of different tax laws, state tax officials are concerned with the tax laws of their respective states. The state tax official administrative mandate is the general policy implicit in state tax laws, namely, that any activities which have tax consequences when conducted by a wholly local business should have the same consequences when conducted by an interstate business. This principle is difficult to fault. Any other would by definition give interstate business a more favorable status, in respect to tax consequences, than that of local business.

Other sales and use tax provisions of the bill with which we are completely in accord may be summarized as follows:

We would suggest that the doctrine of "temporary storage" be incorporated into the bill. It is not unusual for large chain stores and retailers to purchase supplies, equipment, fixtures and other consumable or user items in large quantities and accept physical delivery of same at one or more central warehousing facilities. From this central point of acceptance, the supplies are then distributed by the owner to his various retail outlets located in a number of states where actual first use of the property occurs. Under the provisions of section 114, it would appear that the warehouse state would be the "destination" state to which use tax would accrue although it is not the final state of destination and it is not the state of actual first use of the property. This provision would have impact on Mississippi use tax revenue since our law does not presently allow a tax credit for use tax paid on property temporarily stored in another state where actual first use of the property occurs in our state. In furtherance of this principle, Mississippi law exempts temporary storage where first use occurs in another state.

The requirements of section 104 that freight or transportation charges may not be included in the measure of the use tax levy would likewise have an impact on Mississippi use tax revenue. Our law presently requires that freight charges for transportation of the property to the point of use within the state be included in the base for the levy, primarily as an equalizing factor to the sales tax levy.

The jurisdictional limitation imposed by section 102 which prohibits the imposition of a use tax on a person who does not have a business location or a dwelling place in the state is quite unusual. This would constitute a major change in the existing concept of use tax liability which universally postulates a taxable use within the state as the basis of liability for tax. The practical effect of this limitation is to create what might be called a use tax oasis.

There is no way to pinpoint precisely the total revenue loss to Mississippi because of the jurisdictional limitations imposed by S. 2173. The uniform jurisdictional standard in the proposed act would, however, very seriously interrupt the effective administration of our use tax law and would have a serious and detrimental effect on our use tax revenue-even to the extent of making out-ofstate purchasing more attractive than local purchasing, thereby having an indirect effect on the sales tax revenue from local transactions.

Income Tax

The fundamental purpose of state income taxes, we believe, is to raise revenue for public functions measured by net earnings within that state. Since implementation confronts us with problems only in relation to multistate corporations, it seems the question resolves itself into how best to accurately determine how much such corporations earn in each state. While Missisippi has sought to avoid imposition of harsh or cumbersome requirements, it has traditionally been the advocate of sufficient flexibility in method to serve the interest of accuracy. Any proposal which would now reduce the burden of compliance, eliminate confusion, and increase uniformity which does not do violence to the concept of accuray will have our support.

We suggest the substance of the following amendments to S. 2173 will help perfect such an effort:

1. Where direct accounting methods by corporations or divisions thereof are found to more accurately reflect the net earnings within a state, the state should have authority to require such procedure in lieu of the apportionment formula despite the fact that the tax yield would be increased.

2. Delete the provisions of section 301 which prohibit offsetting adjustments of otherwise allowable deductions, or identify which deductions and to what extent they are presumed to be unrelated to excluded dividends or foreign source income.

3. Confine the unlimited option granted corporations by section 303 to elect consolidated returns to instance where a more accurate result can be

demonstrated.

4. Include the so-called "throwback" provision, found in the Uniform Act (UDITPA), in the sales factor. This will avoid assignment of "no-where income."

Gentlemen, thank you again for this opportunity of expressing our views on this proposed legislation. I have with me Mr. James Haddock, Chief Attorney for the Commission and Mr. Wiley Humphries, Coordinator for the Commission. We will be pleased to furnish any additional information or facts and we will attempt to answer any questions you may now have.

Thank you.

PREPARED STATEMENT OF CHARLES A. BOSWELL

Attached hereto are comments and observations concerning S. 2173 prepared by the staff of the Alabama Department of Revenue.

My general observations are that the passage of this bill would result in inequitable situations between the intrastate operator and the interstate operator. The interstate seller in many instances would have a competitive advantage because his sales would be immune from any state's sales or use tax and income derived from such sales would not be subjected to any state income tax. The bill, in effect, is a state tax reduction bill for interstate corporations and, of course, state revenues would suffer accordingly.

This department recognizes the compliance problems of the multistate operator and has for years promoted uniformity among the states to ease these problems. The department in 1967 adopted by regulation the UDITPA formula using the equally weighted three factors for all corporations not organized under the laws of this state, and this formula has been uniformly utilized since.

Alabama has entered into reciprocal agreements with other states which eliminates any double taxation under the sales and use tax laws. It has adopted a uniform resale exemption certificate and does not tax under the use tax items purchased for use in another state and subsequently brought into this state for use regardless of the amount of use outside this state.

This department will continue to encourage and support methods that ease the compliance burden of the multistate operator, but it cannot support any legislation that puts the Alabama business in a competitive disadvantage with its out-of-state competitor. This, we feel, would be the result of S. 2173. COMMENTS BY THE ALABAMA DEPARTMENT OF REVENUE ON THE INTERSTATE TAXATION BILL OF 1977, S. 2173

TITLE I-SALES AND USE TAXES

Alabama has been involved in sales and use tax administration since 1939. Sales and use taxes are the major source of revenue for the Alabama Special Educational Trust Fund.

It is only natural that we would be concerned with any federal legislation that would affect the school system of Alabama by reduction of revenue.

The fundamental purposes of the use tax is to protect the merchants of this state from unfair competition from out-of-state sellers and to equalize the tax burden on all Alabama consumers. If S. 2173 is adopted by the Congress in its present form, in our opinion, it would eliminate the protection afforded Alabama consumers from 4 to 7 per cent less than the Alabama seller.

The suggestion that the collection burden can be shifted from the vendor to the vendee is unreasonable. It is true that the tax could be collected from the businessman on his purchases from out-of-state sellers, however, it would require an increase in the enforcement area. thereby considerably increasing the cost of collecting the tax. When you consider there are many sales to nonbusiness consumers, the tax involved would be written off as it would not be practical or efficient administration to spend more than you would realize from collecting

the tax. Therefore, we believe that the present system of the out-of-state seller collecting the Alabama tax on all sales to consumers in Alabama is the most efficient method to use. We do not believe that anyone would want unfair competition between the sellers from out-of-state and the sellers in Alabama. This is the situation that would exist if many out-of-state sellers were allowed to sell in this state without collection of the tax.

We, of the Revenue Department, agree that the administrative burden of dealing with so many state and local1 taxing jurisdictions has created a burdensome problem. The burdensome task of record keeping and the many rates of local tax that confronts the out-of-state seller also falls upon the in-state seller who is doing business in the many cities and counties and levy a sales or use tax. We, also, agree that uniformity in record keeping and rates of tax would greatly reduce this burden for both the seller and the administration. Even though S. 2173 seeks to provide relief for the businessman, we believe that this bill will increase the administrative cost of enforcing Alabama revenue laws and reduce the revenue.

There is no way to determine the actual revenue loss because of the limitations imposed by S. 2173. We do believe it would seriously interrupt the effective administration of the Alabama use tax law and reduce tax revenue considerably. It is not impossible for out-of-state purchasing to become popular and as a result have an indirect effect on sales tax revenue.

Section 102(c) of S. 2173 Credit for Prior Tax: The Alabama law has a provision to allow credit for sales tax legally due and paid to another state against use tax due Alabama provided the state in which the seller is located will reciprocate with Alabama. Double taxation can be avoided with each state taking the necessary steps to provide for the credit. Many states already provide for reciprocity.

Section 103, Exemption for Household Goods including Motor Vehicles: The Alabama use tax law levies the tax on tangible personal property purchased for use, storage, or other consumption in Alabama. If tangible personal property is purchased for use in another state and later transferred into this state, the Alabama use tax does not apply.

Section 105, Liability of Sellers Sales to Business Buyers: Provisions are made in the Alabama law to provide the business buyer with direct pay permits, certificates of exemption and sales tax license numbers. If a business buyer does not possess one of the above, his purchases are considered to be taxable.

LOCAL MUNICIPAL AND COUNTY TAXES

The Alabama Department of Revenue is the administrative agency for 25 counties and 235 municipalities that levy sales and use taxes. Present requirements are that these local taxes be reported separately from the state tax. In addition to the 260 local taxes that are administered by the State, a substantial number of cities and counties levy and collect their own sales and use taxes. According to the acts of law passed by the Alabama legislature requiring the Department of Revenue to administer the local taxes, the local taxes must be parallel to the State sales and use tax laws in every respect except for the rate of tax. The fact that the laws are parallel to the state law provides for some uniformity and ease of collection and reporting by the vendors. However, the Department of Revenue has recognized for some time that the volume of local tax levies and the multiplicity of tax rates present a burden not only to the vendors collecting and reporting the taxes but also to the State in administering the taxes.

Even though the State recognizes the extent of the burden placed upon interstate business and intrastate business in devising accounting systems to cope with the many local levies and reports that are required, we are extremely concerned about the effect of S. 2173 on the revenue programs of the municipalities and counties within the State of Alabama.

Many of the local tax levies were initiated because of a need to increase or improve inadequate educational and medical facilities. Much of the revenue, in some instances the entire receipts, generated by these local tax levies have been pledged toward the retirement of bond issues that were engaged to build or improve educational and medical facilities. If federal legislation were passed that reduced the receipts from the municipal and county sales and use tax levies, 1 Local to be discussed later.